2.The following questions are based on the case provided below

Able Inc. and Baker Inc. face the following borrowing costs in the fixed and floating rate markets:

FixedRate MarketFloating Rate Market

BakerT + 1. 90% L + 0.20%

Able T + 0.75%L 0.15%

Each firm desires the rate other than that for which it has comparative advantage.

A dealer stands ready to enter into a swap as either a fixedrate payer or floating-rate receiver (or vice versa). The dealer will pay a fixed T+1.22% against LIBOR or receive T+1.30% against LIBOR. Assume that each firm borrows in the market in which it has comparative advantage and enters into a swap agreement. Analyze the potential gains from swapping for all parties under the following headlines:

a. What does the swap dealer earn? (2 point)

Answer D

b. Obtain the effective loan rate for Able. List all loans Able deals with.(4 points)

Aer

c. By how much is Baker better-off from the swap agreement?(6 points)

d. What is the overall benefit of the three parties: Able, Baker and the Dealer? (2 points)